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Apple’s Run Could Be Done if iPhone Revenue Flattens

Stock (Symbol)

Apple (AAPL)

Stock Price

$194

Sector
Technology
Data is as of
November 17, 2018
Expected to Report
Jan 30
Company Description
Apple’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. Source: Thomson Financial
Sharek’s Take
David SharekApple (AAPL) stock’s run could be done as 59% of sales come from the iPhone, but iPhone unit sales were just 0% last qtr, with the “growth” coming from higher prices. That’s not good. Apple sales rose 20% last qtr, but if iPhone revenue would have been flat, it would have reduced sales growth down to 4%.

And now this: Starting next qtr, Apple management will no longer be providing unit sales data for iPhone, iPad and Mac. Okay, fine. I didn’t track unit sales anyway. But in term of managing my position, I have to know what parts are growing and what parts are slowing. So here’s a rundown: 

  •  iPhone revenue was 59% of total Apple sales last qtr vs 55% a year-ago. iPhone revenue rose 29% last qtr, but the company sold the same number of units compared to the same qtr a year ago, thus the gain in iPhone sales came from a higher selling price ($793 compared to $618 a year ago).
  • Services accounted for 16% of total sales vs 16% of sales a year-ago. Year-over-year growth was 17%. The company was proud it got to $10 billion in services revenue, but the percentage of overall sales was the same, so services isn’t ready to be the lead dog by any means.
  • Macs accounted for 12% of sales, down from 14% a year ago.
  • Wearables is only 7% of sales, but that was up from 6% a year ago. Wearables had 50% revenue growth, but since this is such a small division it didn’t help much. Wearables include Apple Watch, AirPods and Beats products.
  • iPads were 7% of total Apple sales, down from 9% a year ago. Revenue in this division was down 15% year-over-year.

If Apple has a downturn in iPhone sales — ahem, I mean revenue — that would certainly hurt the stock. The growing areas are Wearables at 7% of sales and Services at 16% of sales, which aren’t big enough to make a big difference. Thankfully, Apple does an amazing job buying back stock, so profit growth could could still be in the double-digits with single-digit sales growth. Apple has $237 billion in cash, and $115 billion in debt, for a net cash position of $123 billion. Last qtr it repurchased $19 billion in stock and repaid $3.5 billion in dividends. Apple has an Est. LTG of 13% per year, a yield of 1.5%, and a P/E of just 14. Luckily, with the P/E so low, the stock might find support here. My Fair Value is a P/E of 16, which works out to $216 a share. AAPL is a value, but I’m very concerned about iPhone sales growth going forward. The company needs a new catalyst. I have to reduce my position in this stock, but will continue to hold some shares long-term.

One Year Chart
Last qtr Apple delivered 41% profit growth and beat estimates of 31%, as sales increased 20%, the 8th consecutive qtr of accelerating sales growth.

But management guided estimates lower, thus analysts took their 2019 estimates from $13.56 to $13.48 and 2020 estimates from $14.97 to $14.82. Not bad.

Qtrly profit Estimates are for 25%12%, 8% and 7% profit growth the next 4 qtrs. My guess is these further out estimates are too low, and Apple will deliver 10-20% growth next year. But that’s just a guess.

The Est. LTG of 13% per year is ok, and investors get a 1.5% yield too. This stock has a low valuation, a P/E of 14 is good!

Fair Value
Apple is moving more towards a service business model, where the apps and subscriptions it sells become a more meaningful part of its business model. This should result in a higher valuation, or P/E ratio.

My Fair Value is a P/E of 16, which gives the stock modest upside. Note the P/E on the stock was just 16 the prior two years.

Bottom Line
Apple has had its ups-and-downs the past decade. Just last qtr it was at an All-Time high. Now this qtr people are freaking out, I mean wondering about iPhone sales. And that’s a big concern, as the other divisions aren’t large enough to pick up the slack.

AAPL takes a dive in my Power Rankings, as it was the top ranked stock in all my portfolios after I wrote last qtr’s report. AAPL now ranks 15th in the Conservative Growth Portfolio Power Rankings, and I will sell some shares from this portfolio. In the Growth Portfolio it ranks 33rd, and I will reduce my position somewhat here too. I will sell the stock entirely from the Aggressive Growth Portfolio

 Power Rankings
Growth Stock Portfolio

33 of 42

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

15 of 35